Here's Everything That's Wrong With Investor Behavior, In One Article

A new profile of Bill Miller hit the Wall Street Journal
yesterday and boy is it a doozy. If I were teaching a course on
behavioral investing, and had lost access to all of the
curriculum’s text books for a week, I could probably get by just
on pull-quotes from this piece.

Something happens to investors
when they get around a stock picking manager who’s managed to
string together a few years of market outperformance – they
become giddier than a drunken bachelorette party hanging on the
neck of a Vegas magician who happens by their table at the bar
(I’ve seen this in real life, long story).

For the uninitiated – Bill
Miller’s Legg Mason Value Trust shattered every record on the
books by trouncing the S&P 500 for fifteen straight years
between 1991 and 2005. And then the fund demolished all the
benefit of that fifteen years of outperformance within a two-year
period, between 2007 and 2009. It hardly needs to be said that
the vast majority of the Value Trust’s assets came in toward the
top of this record streak – meaning the average dollar invested
became a loser even despite all the glory of the track record on
its surface.

The entire article is hilarious – through no fault of the
reporter, Kirsten Grind, or the subject, Miller himself – whom I
regard as a brilliant, if flawed icon of the investment
management business. The story here just inadvertently
exemplifies every single flaw and fallacy of the investor
mentality.

I mean, the headline alone:

And now, a running list of our flaws as investors – which find a
way to manifest themselves even when we think we’re aware enough
to get them under control:

Over the last three years, though, Mr. Miller’s Legg
Mason Opportunity Trust has outperformed 97% of the mutual
funds in its category, according to research
firm Morningstar Inc. It was No. 1 in 2012 and
second-best in 2013. Its total return of 67% last year trounced
the S&P 500 stock index’s 32% jump.

As though anyone making big bets on a concentrated
portfolio in one of the greatest stock rallies of all time
couldn’t have done this.

2. We’re acting as though Miller’s behavior during the crisis
wasn’t true of almost all long-only value managers:

Lots of mutual-fund managers took a beating during the
crisis, but none so publicly as Mr. Miller. As his Legg Mason
Capital Management Value Trust fund sank to the bottom of the
rankings, fleeing investors shrank its assets to $2.8 billion
from $21 billion. He refused to on shaken financial
firms like Bear Stearns Cos. and American International
Group Inc., which were then nearly wiped out.

With all due respect, value investors don’t cut losses when
they’re running money in the public eye – they double down and
“ignore price”, focusing on value and why “the market is wrong.”
Third Avenue’s Marty Whitman blew up in the crisis, as
did Fairholme’s Bruce Berkowitz, as did almost all of the
other “legendary” value mutual fund managers.

3. We’re lauding Miller for his guts and having balls – with
other people’s money:

His resurgence largely reflects more of the same:
steadfastness in his beliefs, a stock-picking strategy
dominated by big bets on beaten-down companies, and comfort
taking risks that frighten away other investors.

4. Investors, who fled the fund en masse, are back to throwing
money at Bill Miller, now that he’s gotten his groove back.

Opportunity Trust brought in a net $189 million last year,
the fund’s first increase since 2007, and money has kept coming
in so far this year, boosting total assets to $2.2
billion.

Classic performance chasing behavior. He’ll be back up at another
peak in AUM just as his performance is about to mean-revert back
down to the category average or just as the global economy is
once again set to explode into a million pieces again.
Dollar-weighted mutual fund returns are always hilarious.

5. This time is different:

Since the horrible losing streak, Mr. Miller has read a
pile of books and research papers about crises in hopes of
getting a better grip on what happened.

That should do the trick.

6. No comment:

Before the crisis hit, he attracted $1 billion to $1.5
billion a year in new investor money. Legg Mason didn’t
publicly disclose his pay, but Mr. Miller’s annual salary
likely topped $10 million. In 2006, he bought a 235-foot yacht
called “Utopia.”

The Morningstar analyst quoted neglects to mention that Value
Trust’s backward-looking rating on the fund at the time was
undoubtedly “Five Stars”.

7. Industry professionals aren’t immune either – Legg Mason got
out of “the Bill Miller business” at the bottom and left him with
a smaller role at the firm and a less important fund to manage:

Value Trust rebounded sharply, but it was too little, too
late. In 2011, Legg Mason named a successor to Mr.
Miller, saying the move was part of a long-term succession plan
hatched before the crisis.

8. Bill Miller is betting big once again:

He says he is trying to take advantage of “blindingly
obvious” trends. One-third of the Opportunity Trust fund’s
portfolio is invested in financial firms, with another 14% tied
to the housing market.

If it works out, he will be a genius again and double his assets
under management. If it doesn’t, well, brokers will “manage the
manager” by firing the fund and just start recommending a new
one. There’s very little downside for everyone involved. Except
the investors.